SMB cloud and MSP channel business by the numbers

A strictly “by the numbers” review of the state of the SMB channel in the US paints a portrait of a well-balanced but fragmenting industry. Techaisle’s survey of SMB channel partners finds that revenues from products and services are approximately equal, and that services revenue are being derived from transactions that do not include products as well as from product-inclusive deals. SMB channel respondents report that 58% of revenue is attributable to services-led contracts and that a similar proportion of revenue is derived from recurring sources, vastly different from 2012, 2013 and 2014.

It is worth noting that while measures of this type provide a very useful benchmark for channel partners, some interpretation of the benchmark data is necessary. For example, the proportion of business attributable to services is only part of the issue that SMB channel management is wrestling with: what kind of services (for example, managed PCs or device maintenance?) is an important consideration in evaluating the impact of a channel services revenue stream.

Similarly, growth in services revenue is not necessarily a proxy for progress, as it can result from simple reductions in product revenue rather than effective transition to a business model properly aligned with the market as a whole. Techaisle believes that SMB channel partners that are looking to be part of the “managed services” channel should be targeting just over 20% of services revenue derived from managed services in 2016, and more than 40% by 2018.

The revenue growth expectations are also interesting. Although 63% of SMB channel partners are expecting revenue increases in the next one year, the scenario is quite dismal for VARs as compared to MSPs. 54% more VARs than MSPs are expecting their revenues to remain flat and a percentage of VARs are expecting their revenues to decline by an average of 30%. Even some MSPs are expecting their revenues to decline by an average of 20%.

However, the overall optimism for growth provides some insight into how and where the channel is growing.

Firms relying on business models predicated primarily or entirely on service delivery – and particularly, the managed service providers (MSPs) – are anticipating growth, while those relying on product sales (VARs, SIs) are least likely to offer rosy predictions. This is not “new news,” but it does provide confirmation that the general trend away from products that have been evident in the channel environment is expected to continue. It also provides argument that ever-increasing proportions of the SMB channel will migrate to managed services and/or cloud centric models, to mobility (as a means of wrapping services around client hardware) or to virtualization/converged infrastructure (as a means of building value around back-end hardware).

Another key difference between the different channel delivery models is seen in the lengths of their average sales cycles. VARs, which are often selling products into existing accounts, have relatively short sales cycles, while SIs, who are positioning complex solutions, have longer sales cycles than other channel businesses. One interesting finding from the Techaisle Channel survey is that sales cycle length varies not only by line of business, but also by expertise levels. Firms that are “very comfortable” with mobility experience average sales cycles of 6.25 weeks vs. an average of 15.33 weeks for firms that are not comfortable with mobility; findings for managed services, while not as dramatic, still show differences of more than 2.6 weeks across these categories.

It seems clear that SMB channel firms that invest in building competencies in advanced solutions are able to navigate the opportunity-to-deal process more rapidly than those who lack depth. This is a factor in the channel fragmentation identified by Techaisle in its research and mentioned several times throughout the year.

SMB channel firms that close business quickly will get better sales productivity than those that are slower in moving from interaction to revenue. It will hasten the migration from the “one stop solution shops” to specialists in one of the four main areas - managed services, cloud, mobility and converged infrastructure and virtualization. Today, these capabilities are largely commingled, but within the next three years, Techaisle believes that successful firms will focus on no more than two of the four areas: in the near term, channel businesses may adopt strategies that encompass several of these options to meet a specific set of needs, but over the 2015-2018 period, the depth requirements associated with these four areas will force them to concentrate on some areas and de-emphasize others.